Stewardship codes give sustainability investing in Asia a push

09-01-2017 | Insight

Whereas Asia used to be a laggard in sustainability investing, the region is catching up quickly. New stewardship codes are being introduced at a rapid pace. Robeco endorses the Japanese, Taiwan and Hong Kong stewardship codes.

Michiel

van Esch

Specialist Governance and Active Ownership

Ronnie

Lim

Senior Investment Specialist at Robeco Hong Kong

Speed read

Asia is embracing sustainability investing

Various new stewardship codes are being introduced

They will act as a catalyst for active ownership in the region

The most recent figures of the Global Sustainable Investment Alliance, which date from 2014, still indicate that the part of investments managed sustainably in Asia amount to just under 1% (compared with almost 59% for sustainability leader Europe). Michiel van Esch, engagement specialist at Robeco, expects this figure to increase dramatically. “A growing number of companies in Asia realize they need to consider the sustainability of their business in order to attract investor capital and secure long-term growth,” he says. “They see competitors in Europe and North America managing risk and meeting clients’ needs by incorporating environmental, social and governance (ESG) factors into their business models.”

Corporate governance is important in Asia

Clients are increasingly asking for sustainability integration and a growing number of pension funds are also committed. As a result, sustainability investing is gaining momentum in Asia. “Corporate governance is an important factor in Asia,” says Ronnie Lim, engagement specialist in Asia. “It is becoming increasingly important as international investors and local regulators are imposing global governance standards on the companies that they invest in. Good corporate governance requires several factors, including an effective board of directors, shareholders which are long-term oriented and engaged with company management, and good levels of transparency and communication with a company’s stakeholders.”

“There is an increasing recognition that although there are many high quality companies operating in Asia, they could be better managed,” Lim continues. “Companies could be more innovative, or have better financial reporting, or tighter capital discipline, and ultimately be rewarded with higher valuations by the capital markets. Therefore investors are expected to also contribute to creating corporate value for the benefit of pension funds and broader society.”

Many companies are controlled by their family founders and or are State-Owned-Enterprises (’SOEs’) whose objectives are often not aligned with those of their minority investors. “At the same time,” says Lim, “we have seen an increase in activism among investors. In Asia, it is common for shareholders to hold a small percentage of the floating shares, so it sometimes makes sense for investors to work together if they want to improve company’s corporate governance.”

Following Japan and Malaysia, new stewardship codes are currently being developed or introduced in Taiwan, Hong Kong, South Korea and Singapore. The latter launched its voluntary stewardship principles in November, which are already being endorsed by 38 asset managers and companies.

What’s a stewardship code?

Stewardship means that an institutional investor takes responsibility and assumes an active stance towards the companies in which it invests, on behalf of its beneficial owners. “Robeco embraces this concept,” Van Esch states, “with a stewardship policy, active voting and engagement and an exclusion policy. This means that when a new stewardship code is introduced, we typically comply with its principles. Robeco complies with various stewardship codes, including the UK Stewardship code, the Dutch Eumedion Best Practice for Engaged Share-Ownership, the Hong Kong Principles for Responsible Ownership, the Japanese Stewardship Codes and the Taiwan Stewardship Principles for institutional investors.”

The stewardship concept is gaining momentum across the world. The first Stewardship Code was published in 2010 by the UK’s Financial Reporting Council (FRC) in response to criticism about the role of institutional investors in the financial crisis. More than 300 signatories have signed it to date, including Robeco. “In a quality assessment of its signatories, the Financial Reporting Council awarded us the highest tier 1 rating for our stewardship policy. This means that we provide a good quality and transparent description of our approach to stewardship and explanations of an alternative approach where necessary,” Van Esch says.

In 2014, the launch of the Japanese Stewardship Code marked an important step forward in Asia. “Robeco also signed this code. Japan sees solid corporate governance as something that can make the equity market more attractive for international investors and that is key to sustainable, long-term economic growth.”

Japan was followed by Malaysia, which in 2014 launched its Code for Institutional Investors, the second code in emerging markets after South Africa. The International Corporate Governance Network recently issued a global set of stewardship principles called the ICGN Global Stewardship Principles.

A catalyst for active ownership

With a population of more than four billion people, and some of the world’s fastest-growing companies, Asia is essential to the global advance of sustainability investment. “Throughout the region, we expect the introduction of stewardship codes to act as a catalyst for fruitful discussions between companies and investors,” Van Esch says. “We hope that a growing number of investors can give a push to active ownership in Asia.”

Asia is an important strategic region for Robeco. Robeco has had a presence in Asia-Pacific since 2005 and has been growing its footprint in the region with offices in Australia, China, Hong Kong, Japan, Korea and Singapore. Van Esch himself has traveled to Hong Kong and Japan several times this year as a growing number of companies are willing to engage with asset managers. Robeco is also stepping up its active ownership activity in Asia with the appointment of Ronnie Lim as engagement specialist dedicated to Asian companies.

“Sustainability investing will become more important to win clients in Asia, both in developed and in emerging markets,“ says Van Esch. “We welcome the proliferation of stewardship codes, as they increase awareness of the role of institutional investors in the governance of the companies in which they invest. This creates momentum for active ownership in the region. We also hope that as more asset managers will engage with companies in Asia, there will be more opportunities for collaborative engagement. This will increase our effectiveness.”

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